<PAGE>


                                   FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   (Mark one)

             (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended  July 31, 1998
                                                 -------------

                                       OR

             ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                          Commission File No. 0-13076
                                              -------

                              LOT$OFF CORPORATION


                  DELAWARE                                74-2640559
------------------------------------------    ---------------------------------
      (State or other jurisdiction of                (I.R.S. Employer
       incorporation or organization                 Identification No.)

   1201 Austin Highway, #116, San Antonio, TX             78209-4859
------------------------------------------    ---------------------------------
    (Address of principal executive offices)              (Zip Code)

                             Telephone: (210) 805-9300
               ----------------------------------------------------
               (Registrant's telephone number, including area code)


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X   No:
                                                  ---     ---

------------

4,202,610 shares of the Registrant's Common Stock were outstanding at August
31, 1998, which includes 832,697 shares held in escrow and awaiting
distribution to holders of allowed general unsecured claims and 763,723
shares distributed to holders of allowed general unsecured claims on
September 14, 1998.

------------

<PAGE>


<TABLE>
<CAPTION>

                                 FORM 10-Q INDEX
                                                                              PAGE
                                    PART I

<S>                                                                           <C>
ITEM 1.   Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .  3

          Condensed Consolidated Balance Sheets:  July 31, 1998
          (unaudited); January 30, 1998; and August 1, 1997 (unaudited) . . .  3

          Condensed Consolidated Statements of  Operations:  thirteen
          and twenty-six weeks ended July 31, 1998 (unaudited) and
          thirteen and twenty-six weeks ended August 1, 1997 (unaudited). . .  5

          Condensed Consolidated Statements of Cash Flows:  twenty-
          six weeks ended July 31, 1998 (unaudited) and twenty-six
          weeks ended August 1, 1997 (unaudited). . . . . . . . . . . . . . .  6

          Notes to Condensed Consolidated Financial Statements (unaudited). .  8

ITEM 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations . . . . . . . . . . . . . . . . . . . . . 13

                                  PART II

ITEM 1.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .19

ITEM 2.   Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .19

ITEM 3.   Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .19

ITEM 4.   Submission of Matters to a Vote of Security Holders. . . . . . . . .20

ITEM 5.   Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .20

ITEM 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .20


          Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

          Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . .21

</TABLE>

<PAGE>

                                      PART I


ITEM 1.   FINANCIAL STATEMENTS


                        LOT$OFF CORPORATION AND SUBSIDIARIES

                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (UNAUDITED)

                                       ASSETS


<TABLE>
<CAPTION>

                                               July 31, 1998    January 30, 1998      August 1, 1997
                                               -------------    ----------------      --------------
<S>                                            <C>              <C>                   <C>
CURRENT ASSETS:
Cash and cash equivalents                        $   526,272         $   473,533         $   453,388
Accounts receivable                                  992,586             113,463             616,469
Merchandise inventories                           14,771,043          15,309,715          10,801,656
Prepaid and other current  assets                    309,448             265,814             548,792
                                                 -----------         -----------         -----------
TOTAL CURRENT ASSETS                              16,599,349          16,162,525          12,420,305
                                                 -----------         -----------         -----------

PROPERTY AND
 EQUIPMENT-NET                                     3,163,579           3,632,965           3,816,739

OTHER ASSETS                                         750,824             548,464             431,184
                                                  ----------          ----------          ----------

TOTAL ASSETS                                     $20,513,752         $20,343,954         $16,668,228
                                                 -----------         -----------         -----------
                                                 -----------         -----------         -----------

</TABLE>


  See accompanying notes to these condensed consolidated financial statements.


                                       -3-

<PAGE>

                     LOT$OFF CORPORATION AND SUBSIDIARIES

                    CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

                LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

<TABLE>
<CAPTION>

                                               July 31, 1998    January 30, 1998      August 1, 1997
                                               -------------    ----------------      --------------
<S>                                            <C>              <C>                   <C>
CURRENT LIABILITIES:
   Credit facility                                $6,539,495          $6,330,598          $3,400,369
   Accounts payable-trade                          3,357,763           3,132,965           1,267,041
   Accounts payable-other                          1,751,441           3,333,093           2,119,447
   Accrued expenses and
      other current liabilities                    1,671,025           1,597,859           1,721,594
   Bank checks outstanding                           960,069           1,048,855           1,088,575
   Current portion of long-term debt                 186,136             131,553                   -
                                                 -----------         -----------         -----------
TOTAL CURRENT LIABILITIES                         14,465,929          15,574,923           9,597,326

LONG-TERM DEBT AND OTHER
OBLIGATIONS, less current portion                  4,066,902           1,263,263           1,444,762

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS'  EQUITY:
   Series A Preferred Stock                                -                   -           4,280,400
   Series B Preferred Stock                                -           3,991,050           3,991,050
   Common Stock                                       42,026              25,325               8,561
   Additional paid-in capital                     65,136,349          60,447,467          56,147,275
   Accumulated deficit                           (63,197,454)        (60,958,074)        (58,801,146)
                                                 -----------         -----------         -----------
TOTAL STOCKHOLDERS' EQUITY                         1,980,921           3,505,768           5,626,140
                                                 -----------         -----------         -----------

TOTAL LIABILITIES AND
   STOCKHOLDERS' EQUITY                          $20,513,752         $20,343,954         $16,668,228
                                                 -----------         -----------         -----------
                                                 -----------         -----------         -----------

</TABLE>

See accompanying notes to these condensed consolidated financial statements.


                                     -4-

<PAGE>



                         LOT$OFF CORPORATION AND SUBSIDIARIES

                    CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                     (UNAUDITED)

<TABLE>
<CAPTION>

                                                      Thirteen Weeks Ended                   Twenty-six Weeks Ended
                                               ---------------------------------       ---------------------------------
                                               July 31, 1998      August 1, 1997       July 31, 1998      August 1, 1997
                                               -------------      --------------       -------------      --------------
<S>                                            <C>                <C>                  <C>                <C>
NET SALES                                        $11,130,934         $10,381,017         $23,365,837         $22,300,169
COST OF SALES                                      7,818,327           7,350,110          16,489,006          15,207,530
                                                 -----------         -----------         -----------         -----------


GROSS PROFIT                                       3,312,607           3,030,907           6,876,831           7,092,639
                                                 -----------         -----------         -----------         -----------

OPERATING EXPENSES:
  Selling, advertising, general
      and administrative                           5,765,543           4,980,380          11,572,240          10,785,809
  Depreciation and amortization                      201,282             177,285             402,564             354,570
   Pre-opening expenses                               70,123                   -              70,123                   -
   Store closing costs                               597,610                   -             723,256                   -
   Reorganization items                              100,000             200,000             100,000             500,000
                                                 -----------         -----------         -----------         -----------
TOTAL OPERATING EXPENSES                           6,734,558           5,357,665          12,868,183          11,640,379
                                                 -----------         -----------         -----------         -----------

OPERATING INCOME (LOSS)                           (3,421,951)         (2,326,758)         (5,991,352)         (4,547,740)

OTHER (INCOME) EXPENSE:
   Non-operating (income) expense, net              (392,317)                  -          (4,208,054)                  -
   Interest (income) expense, net                    229,643             127,225             456,082             269,439
                                                 -----------         -----------         -----------         -----------
TOTAL OTHER (INCOME) EXPENSE                        (162,674)            127,225          (3,751,972)            269,439
                                                 -----------         -----------         -----------         -----------

INCOME (LOSS) BEFORE  INCOME TAXES                (3,259,277)         (2,453,983)         (2,239,380)         (4,817,179)

(BENEFIT FROM)  INCOME TAXES                               -                   -                   -                   -
                                                 -----------         -----------         -----------         -----------

NET INCOME (LOSS)                                $(3,259,277)        $(2,453,983)        $(2,239,380)        $(4,817,179)
                                                 -----------         -----------         -----------         -----------

PREFERRED DIVIDENDS                                        -             (30,315)                  -             (30,315)
                                                 -----------         -----------         -----------         -----------

EARNINGS APPLICABLE TO
   COMMON STOCK                                  $(3,259,277)        $(2,484,298)        $(2,239,280)        $(4,847,494)

INCOME (LOSS) PER COMMON  SHARE:
   Basic                                         $     (0.78)        $     (0.39)        $     (0.54)        $     (0.52)
                                                 -----------         -----------         -----------         -----------
                                                 -----------         -----------         -----------         -----------

WEIGHTED AVERAGE SHARES:
   Basic                                           4,190,741           6,341,495           4,162,663           9,271,205
                                                 -----------         -----------         -----------         -----------
                                                 -----------         -----------         -----------         -----------

</TABLE>


See accompanying notes to these condensed consolidated financial statements.


                                       -5-

<PAGE>


                         LOT$OFF CORPORATION AND SUBSIDIARIES

                    CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                     (UNAUDITED)



<TABLE>
<CAPTION>

                                                                     Twenty-six Weeks Ended
                                                               ---------------------------------
                                                               July 31, 1998      August 1, 1997
                                                               -------------      --------------
<S>                                                            <C>                <C>
CASH FLOWS FROM OPERATING
  ACTIVITIES:
Net  income (loss)                                              $(2,239,380)        $(4,817,179)
Adjustments to reconcile net income (loss) to net
   Cash provided by (used in) operating activities:

   Depreciation and amortization                                    402,564             354,570
   Asset impairment charges                                         119,912                   -
   Reorganization items                                             100,000             500,000
   Non-cash interest expense on long-term debt                       53,035                   -
Changes in assets and liabilities:
   Accounts receivable                                             (329,123)            101,383
   Merchandise inventories                                          538,672           2,173,302
   Prepaid and other current assets                                 (43,634)           (155,266)
   Other assets                                                     (14,510)            (72,841)
   Accounts payable-trade                                           224,798             108,072
   Accounts payable-other                                        (1,581,652)           (828,555)
   Accrued expenses and other current liabilities                   (26,834)             98,384
                                                                -----------         -----------
Net cash provided by (used in) operating
    activities                                                    2,796,152          (2,538,130)
                                                                -----------         -----------

CASH FLOWS FROM INVESTING
  ACTIVITIES:
Capital expenditures, net                                           (53,090)           (182,549)
                                                                -----------         -----------
Net cash provided by (used in) investing activities                 (53,090)           (182,549)
                                                                -----------         -----------

</TABLE>


See accompanying notes to these condensed consolidated financial statements.


                                      -6-

<PAGE>

                        LOT$OFF CORPORATION AND SUBSIDIARIES

                   CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                    (UNAUDITED)
                                    (CONTINUED)

<TABLE>
<CAPTION>

                                                                      Twenty-six Weeks Ended
                                                                ---------------------------------
                                                                July 31, 1998      August 1, 1997
                                                                -------------      --------------
<S>                                                             <C>                <C>
CASH FLOWS FROM FINANCING
  ACTIVITIES:
Proceeds from credit facility                                    32,525,530          28,251,967
Payments on credit facility                                     (32,316,633)        (30,248,178)
Bank checks outstanding                                             (88,786)            520,865
Payments on long-term debt                                          (58,750)           (266,667)
Proceeds from long-term debt and warrants                         2,719,369                   -
Net proceeds from sale of Common and Preferred Stock                      -           4,094,783
Net proceeds from exercise of stock options                         121,251                   -
Cash in escrow                                                            -             330,000
                                                                -----------         -----------
Net cash provided by (used in) financing
  activities                                                      2,901,981           2,682,770
                                                                -----------         -----------

Increase (decrease) in cash and cash equivalents                $    52,739         $   (37,909)
Cash and cash equivalents at beginning of period                    473,533             491,297
                                                                -----------         -----------
Cash and cash equivalents at end of period                      $   526,272         $   453,388
                                                                -----------         -----------
                                                                -----------         -----------

SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:
Cash paid during the period for interest                        $   385,618         $   311,629

SUPPLEMENTAL SCHEDULE OF NON-CASH  FINANCIAL ACTIVITIES:
Conversion of liabilities subject to compromise to:
   - Long-term debt                                             $         -         $ 1,394,816
   - Accounts payable-other                                     $         -         $   458,111
   - Series B Preferred Stock                                   $         -         $ 3,991,050
   - Additional paid-in capital                                 $         -         $24,349,075
Conversion of Series B Preferred Stock to:
   - Common Stock                                               $    15,964         $         -
   - Additional paid-in capital                                 $ 3,975,086         $         -
Warrants issued                                                 $   187,850         $         -

</TABLE>

See accompanying notes to these condensed consolidated financial statements.


                                       -7-

<PAGE>


                         LOT$OFF CORPORATION AND SUBSIDIARIES

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                     (UNAUDITED)

NOTE 1:   The condensed consolidated balance sheet at January 30, 1998 has been
          condensed from the audited consolidated balance sheet at January 30,
          1998.

          The condensed consolidated balance sheets at July 31, 1998 and August
          1, 1997, the condensed consolidated statements of operations and cash
          flows for the thirteen and twenty-six weeks ended July 31, 1998 and
          August 1, 1997 and the condensed consolidated statements of cash flows
          for the thirteen and twenty-six weeks ended July 31, 1998 and August
          1, 1997 have been prepared by the Company without audit.  In the
          opinion of management, all adjustments necessary to present fairly the
          condensed consolidated financial position, results of operations and
          cash flows have been made.  The results of operations for the
          twenty-six week period ended July 31, 1998 are not necessarily
          indicative of the operating results for a full year or of future
          operations.

          Certain information and footnote disclosures normally included in
          financial statements prepared in accordance with generally accepted
          accounting principles have been condensed or omitted.  These condensed
          consolidated financial statements should be read in conjunction with
          the consolidated financial statements and notes thereto  included in
          the Registrant's  annual report on  Form 10-K for the year ended
          January 30, 1998.

          The Company is a regional, extreme value retailer specializing in
          close-out merchandise.  The actual merchandise mix fluctuates by
          category, by season and by store based on customer needs and buying
          trends, demographics and the availability of products at close-out
          prices.  This merchandising concept is designed to appeal to
          value-conscious shoppers and other bargain hunters, and management is
          hopeful its continued implementation will lead to increased store
          traffic and improved operating results.  The Company's business plan
          is focused on achieving higher gross margins, higher store
          contribution and controlled corporate overhead, all designed to
          promote overall profitability, and on being a major factor in extreme
          value retailing in Texas.  The key elements of this strategy include
          the geographic consolidation of the chain and the liquidation and
          closing of under-performing stores and stores located outside of the
          reduced market area.  The management team is concentrating on
          optimizing the contribution from store operations while maintaining
          only the absolute minimum amount of corporate overhead necessary to
          support store operations, on expanding its presence in Texas, on
          collecting on judgments from significant litigation (see Note 5) and
          on maximizing shareholder value.

          The Company's ability to continue as a going concern will be affected
          by a number of factors, including, but not limited to, the need to
          remain in compliance with the terms, covenants and conditions of it
          revolving credit facility, the degree of success in continuing to
          increase sales, the ability to achieve an operating profit and the
          ability to maintain trade credit and merchandise flows to its stores.
          While management believes that the downsizing of stores and the
          reduction in the geographic area it serves has facilitated its efforts
          to improve the Company's operating performance and that the
          recapitalization implemented upon the consummation of its Plan,
          coupled with the receipt of net lawsuit proceeds, the receipt of
          contingent claim proceeds from GECC (see Note 4) and the recent note
          financing (see Note 4), have strengthened its financial position and
          alleviated concerns of credit and merchandise suppliers, no assurance
          can be given that the Company will be successful in its continuing
          efforts to return to profitability.  The anticipated receipt of
          additional proceeds from the Company's lawsuit related to certain
          parties' breaches of contractual obligations, as well as certain other
          violations, especially conversion, related to the Company's November
          1994 Regulation S offering would further strengthen the Company's
          financial position.


                                         -8-
<PAGE>

          If the Company's plans to improve operations are not successful in
          producing results which comply with the covenants of its revolving
          credit facility (see Note 4), which the Company and GECC amended July
          24, 1998, and in achieving sustained profitability, management will
          consider, among other alternatives, strategic and/or financial
          alliances with third parties and the merger or sale of all or a part
          of the Company.

          Management believes that borrowings available under its revolving
          credit facility, available trade credit, its restructuring of certain
          obligations under the Plan, the $5.8 million in proceeds received from
          the purchase by GECC of a contingent claim on a $10,000,000 portion of
          the potential net proceeds from the judgment obtained against The 
          Chase Manhattan Bank (see Notes 4 and 5), net proceeds from the
          recent note financing, anticipated proceeds from outstanding
          litigation, its operating cash flow and its cash on hand will be
          adequate to finance its operations, including the opening of new
          stores in Texas, through fiscal 1999.  No assurance can be given,
          however, that such sources of capital will be sufficient or that the
          Company will be successful in its continuing efforts to attain
          profitability.  For this reason, any investment in Common Stock should
          be considered speculative.  The receipt of additional proceeds from
          the significant litigation brought by the Company could add
          significantly to the Company's liquidity and capital resources.  See
          Note 5.

NOTE 2:   On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc.
          ("50-OFF") and its significant subsidiaries (together, the "Debtors")
          filed voluntary petitions for relief under chapter 11 of the United
          States Bankruptcy Code (the "Bankruptcy Code") in the United States
          Bankruptcy Court for the Western District of Texas, San Antonio
          Division (the "Court").  The filing was precipitated by the
          notification from 50-OFF's then asset based lender that it was in
          violation of the minimum gross margin and the minimum working capital
          financial covenants of its credit agreement and that such breaches
          constituted events of default under the loan documents.  The lender
          subsequently established additional availability reserves which
          reduced availability, imposed certain increased fees and other charges
          and accelerated fees deemed earned at the initial closing, which,
          individually and together, substantially impacted 50-OFF's financial
          liquidity and, therefore, its ability to acquire and maintain much
          needed inventory for its stores.  50-OFF was unable to secure the
          resources required to cure the defaults under the loan documents and
          to implement its business plan and effect the changes believed
          necessary to improve operations and reverse its disappointing
          operating results without the protections afforded under the
          Bankruptcy Code.  50-OFF continued to manage its business as a debtor
          in possession pursuant to sections 1107 and 1108 of the Bankruptcy
          Code while management formulated and promoted a plan of
          reorganization.  At a confirmation hearing held on June 3, 1997,
          United States Bankruptcy Judge Leif M. Clark entered an order
          confirming the Debtors' Joint Plan of Reorganization, as Amended and
          Modified (the "Plan").  The Plan became effective June 16, 1997 (the
          "Effective Date").

          The Plan required that the Company's existing senior secured revolving
          credit facility lender, General Electric Capital Corporation ("GECC"),
          provide a post-confirmation revolving credit facility or be replaced
          by a new senior secured lender so that the Company would have a source
          of revolving funds to continue to operate.  GECC provided such
          financing.  See Note 4.  The Plan also provided for the restructure of
          the Company's collateralized obligation to MetLife Capital Corporation
          [recently acquired by an affiliate of GECC and now known as GE Capital
          Business Asset Funding ("GEC-BAF")] at a face amount of $850,000; and
          the Plan provided for the payment of such amount over approximately
          seven years.  GEC-BAF agreed to such treatment with the balance of its
          claim (approximately $3.3 million) becoming an allowed general
          unsecured claim.  See Note 3.

          The Plan also provided for the cancellation of all non-priority
          unsecured indebtedness of the Company.  Such cancellation caused the
          elimination of over $25 million of unsecured debt and the $3.3 million
          of collateralized debt which was converted to unsecured debt from the
          Company's balance sheet.  Under the Plan, as further modified by Court
          order on March 19, 1998 (see Note 3), each holder of an allowed
          general unsecured claim will, in partial cancellation of its allowed
          claim ($3,991,050 in the aggregate), receive a pro rata share of
          1,596,420 shares of LOT$OFF's common stock (the "Common Stock").
          Certain further obligations of the Company to holders of allowed
          general unsecured claims are secured under the Plan by a lien up to
          the full face amount of the balance of their allowed claims against
          potential

                                         -9-
<PAGE>

          net lawsuit proceeds over $3,991,050 from significant litigation being
          prosecuted by the Company.  See Note 5.  As net proceeds over
          $3,991,050 (net of certain items set forth in the Plan) from such
          litigation are received by the Company, holders of allowed general
          unsecured claims will receive additional shares of Common Stock and/or
          cash (provided that at least the Excess Net Lawsuits' Proceeds, up to
          $1.5 million as defined in the Plan, will be paid in cash) as
          determined under the Plan.  The receipt of such Common Stock and/or
          cash by holders of allowed general unsecured claims will result in a
          proportionate release of the lien.  By the Company's issuing such
          Common Stock and/or paying such cash to allowed general unsecured
          creditors, such creditors will be essentially receiving the net value
          of the Company's significant litigation which was pending pre-Petition
          Date up to the full face amount of their allowed claims.  See Notes 3
          and 5.

          Finally, the Plan provided for the recapitalization of the Company
          through cash raised from 50-OFF's existing common stockholders (the
          "Rights Offering") and, potentially, as discussed above, from the
          litigation.  Specifically, the Plan provided for the issuance to such
          stockholders of rights to subscribe for units, each consisting of 20
          shares of  Series A Preferred Stock and 20 shares of Common Stock (a
          "Unit").  Up to 122,009 Units and a minimum of 30,500 Units could be
          sold in the Rights Offering at $100.00 per Unit.  The record date for
          determining which holders of 50-OFF common stock ("Old Common Stock")
          were entitled to vote on the Plan and receive such rights was March
          21, 1997.  Persons who acquired Old Common Stock after such record
          date were not entitled to vote on the Plan or subscribe for Units
          pursuant to the Rights Offering. The Rights Offering expired on May
          22, 1997.  At the confirmation hearing on June 3, 1997, the Company
          announced it had received more than enough subscriptions for Units for
          the required minimum in the Rights Offering to be met.  Subscriptions
          received in the Rights Offering were held in escrow with Bank One,
          Texas N. A. pending the Effective Date of the Plan.

          Contemporaneously with its filing of the Plan on February 6, 1997, the
          Company filed the Disclosure Statement With Respect to the Debtors'
          Joint Plan of Reorganization ("the Disclosure Statement") setting
          forth more detailed information regarding the Company and the Plan.
          Under applicable Court rules and procedures, a hearing was held to
          review and approve the Disclosure Statement, which was approved as
          containing adequate information in accordance with section 1125 of the
          Bankruptcy Code on March 20, 1997.  Upon approval of the Disclosure
          Statement by the Court, the Plan and Disclosure Statement were
          furnished to all creditors of the bankruptcy estates and all holders
          of Old Common Stock as of March 21, 1997 and were also filed with the
          SEC.  Votes in support of the Plan were solicited, and, at the
          confirmation hearing on June 3, 1997, the Company announced that the
          Plan had been approved by both creditors and stockholders.

          On the Effective Date, certain key elements of the Plan were
          implemented, including:  the Company's corporate name was changed from
          50-OFF to LOT$OFF Corporation ("LOT$OFF" or the "Company"); the Old
          Common Stock was canceled, along with all then existing options and
          warrants to buy Old Common Stock; and 856,080 shares of LOT$OFF Series
          A Preferred Stock (each such share was convertible into two shares of
          Common Stock and was entitled to a 5.5%, $0.275, cumulative annual
          dividend) and 856,080 shares of Common Stock (LOTS:  CUSIP #
          545674103) were issued to subscribers to the Rights Offering for gross
          proceeds of $4,280,400.  Also on the Effective Date, LOT$OFF entered
          into a $15,000,000 revolving credit agreement maturing on June 16,
          2000 with GECC.  See Note 4.  The proceeds of the facility, together
          with the net proceeds from the Rights Offering,  were used to
          refinance the Company's debtor in possession facility, also with GECC,
          and to provide post-confirmation working capital for increased
          inventories for its then 41 stores and selected other general
          corporate purposes, including financing LOT$OFF's exit from
          bankruptcy.


                                         -10-
<PAGE>

NOTE 3:   Prior to the Effective Date, liabilities in existence at October 9,
          1996 were reflected as liabilities subject to compromise in the
          Company's consolidated balance sheet.  The principal categories of
          claims included in such liabilities subject to compromise were as
          follows:
<TABLE>
<S>                                                                <C>
          Secured debt, 8.5%, collateralized by furniture,
          fixtures and equipment...................................$  4,179,942
          Secured debt (capital leases), collateralized by signs...      88,498
          Trade and other miscellaneous claims,
          including costs of lease rejections of
          approximately $5,869,000.................................  25,924,612
                                                                    -----------
                                                                    $30,193,052
                                                                    -----------
                                                                    -----------
</TABLE>

          Under the Plan, these $30,193,052 of liabilities subject to compromise
          were converted to: long-term debt - $1,394,816 (see Note 4); accounts
          payable other - $458,111;  Series B Preferred Stock - $3,991,050; and
          additional paid in capital - $24,349,075.  These amounts may be
          subject to adjustments as a result of actions of the Court and/or
          developments with respect to disputed claims.  The procedures used to
          determine the amount of any additional liabilities or of any
          elimination of liabilities have not been completed.

          On May 12, 1998, a decision and order was entered by Judge Leif M.
          Clark in the Company's bankruptcy proceeding in the Court effectively
          denying creditors in the bankruptcy proceeding leave to file late
          proofs of claim or, alternatively, excuse from filing proofs of claim
          by finding that the confirmation of the Company's Plan, operates as
          RES JUDICATA to bar the allowance of any late claims that have been or
          might be filed in the Company's bankruptcy case.  The Company
          estimates that at least $5.9 million of claims were eliminated by such
          order.  The Company's best estimate of the maximum amount of unsecured
          claims which will ultimately be allowed by the Court is $28.3 million,
          $3,991,050 of which were satisfied by the issuance of Series B
          Preferred Stock under the Plan.  The amount of allowed claims may
          differ materially from the Company's estimate; additional amounts may
          arise from the Court's fixing of allowed claims for disputed amounts.


          CONVERSION OF SERIES B PREFERRED STOCK

          On March 19, 1998, in response to the Company's motion to modify the
          Plan by consolidating certain steps to be taken pursuant to the Plan
          and with the support of the Class 7 agent and its counsel,
          representing the allowed general unsecured creditors, the Court
          entered an order to consolidate the treatment of Class 7 creditors by
          allowing the issuance of two shares of Common Stock in lieu of any
          single share of Series B Preferred Stock and other intermediate steps
          which would otherwise have been required under the Plan.  The
          immediate effect of the order was to cause the conversion of the
          previously issued, but undelivered, 798,210 shares of Series B
          Preferred Stock into 1,596,420 shares of Common Stock  and the
          cancellation of the Series B Preferred Stock and any obligation of the
          Company to issue Series A Conversion Rights (as defined in the Plan)
          or Series A Preferred Stock to allowed general unsecured creditors
          under the Plan effective March 19, 1998.  Of such shares of Common
          Stock, 832,697 are now in an escrow account at Continental Stock
          Transfer & Trust Company for the benefit of holders of allowed general
          unsecured claims pending delivery upon the resolution of claims
          objections; an initial distribution of 763,723 of such shares was made
          September 14, 1998.  Future obligations, if any, to the allowed
          general unsecured creditors (up to the full face amount of their
          allowed claims, depending only on Net Lawsuits' Proceeds as defined in
          the Plan) may be satisfied by the issuance of additional shares of
          Common Stock and/or cash (provided that at least the Excess Net
          Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, must be
          paid in cash).


                                         -11-
<PAGE>

NOTE 4:   CREDIT FACILITY

          On June 16, 1997, the Company, with the approval of the Court, entered
          into a credit agreement (as amended on August 28, 1997, December 22,
          1997, February 15, 1998, April 17, 1998, June 12, 1998 and July 24,
          1998) with GECC providing the Company with a line of credit through
          June 16, 2000 of up to $15,000,000, including letters of credit.
          Borrowings under the line are limited to a borrowing base equal to a
          percentage of eligible inventory at cost:  August 15 through December
          15, 65%; and December 16 through August 14, 60%.  Interest under the
          line is charged on funds borrowed at the annualized yield of 30-day
          commercial paper (currently 5.56%) plus 3%.  The line of credit is
          collateralized by inventory, accounts receivable and other assets.
          The credit agreement, as amended, contains certain reserve 
          requirements, various restrictive covenants, including restrictions 
          on the payment of dividends on Common Stock, and various financial 
          covenants, including minimum availability, minimum working capital 
          ratio and minimum EBITDA.  On July 31, 1998, the Company had 
          approximately $8,347,000 available for borrowings under the credit 
          facility (after reserves of $749,000) of which $6,539,000 was 
          committed, leaving a net availability of $1,059,000, and was not in 
          default under the credit agreement.

          LONG-TERM DEBT

          Long-term debt at July 31, 1998 consists of five general types of
          obligations.  The furniture and fixture note, ad valorem tax notes and
          non-ad valorem tax notes are long-term debts settled as part of the
          Plan.  Long-term debt consists of the following:



<TABLE>
<CAPTION>

                                                      JULY 31, 1998   JANUARY 30, 1998
                                                      -------------   ----------------
<S>                                                   <C>             <C>
          Promissory notes collateralized by
          furniture, fixtures and equipment . . . .      $819,516            $849,559
          Notes to ad valorem taxing
          authorities . . . . . . . . . . . . . . .       385,992             414,698
          Notes to taxing authorities, other
          than ad valorem taxing authorities. . . .       130,559             130,559
          Guarantee to GECC . . . . . . . . . . . .     1,877,403                -
          Senior subordinated notes . . . . . . . .     1,039,568                -
          Less:  current portion. . . . . . . . . .      (186,136)           (131,553)
                                                       ----------          ----------
                                                       $4,066,902          $1,263,263
                                                       ----------          ----------
                                                       ----------          ----------

</TABLE>




          On April 17, 1998, as part of a corporate reorganization involving the
          formation of a Delaware limited partnership, the Company assigned its
          judgment and cause of action against Chase to such newly formed
          limited partnership.  The limited partnership was formed on April 17,
          1998 by two wholly-owned subsidiaries of the Company, as the general
          partner and common limited partner, and GECC, as the preferred limited
          partner.  GECC acquired its preferred limited partnership interest for
          $5.8 million or 58 cents on the dollar, resulting in a gain of
          $3,815,737 net of certain related expenses.  Such interest represents
          a contingent claim on a $10 million portion of the potential net
          proceeds from the $148,575,000 judgment against Chase.  See Note 5.
          While the Company has no material present financial obligation to GECC
          or the partnership, upon receipt of net proceeds from Chase, or
          otherwise, attributable to the judgment, GECC could receive as much as
          $10,000,000 (but in no event less than a guaranteed $3,000,000),
          according to a scheduled payout with respect to its contingent claim.
          The $3,000,000 minimum is cross-collateralized to the Company's
          indebtedness to GECC (see Credit Facility, above) and is payable upon
          the sooner of the resolution of the Chase litigation, April 17, 2003
          or certain other events.  As of July 31, 1998, the Company reflects a
          $1,877,403 (discounted at 10%) liability in the consolidated balance
          sheet for the minimum guarantee to GECC.

          Effective July 31, 1998, the Company completed a private placement of
          $1,445,000 principal amount of senior subordinated notes (the "Notes")
          with detachable warrants to purchase up to 216,750 shares of


                                         -12-
<PAGE>

          Common Stock at $4.83 per share.  The proceeds will be used to
          facilitate and accelerate the Company's plans to open additional
          stores in Texas and for working capital.  The Notes accrue interest at
          9.25% which is paid semi-annually and are specifically subordinated to
          only GECC.  There is no prepayment penalty on the Notes which mature
          August 15, 2000 or at the option of the holder if a change in control
          of the Company occurs (defined as an accumulation of 51% of the
          Company's Common Stock by any person or group) after August 1, 1999.
          The warrants to purchase Common Stock expire at the end of July 2002.
          The Notes may be used in satisfaction of the warrant exercise price.
          In conjunction with the placement, the Company issued an additional 
          72,250 warrants and paid $77,250 for fees and expenses.

 NOTE 5:  In November 1994, 50-OFF received subscriptions for approximately
          1,810,000 shares of Old Common Stock in a Regulation S offering to
          qualified investors.  50-OFF received net proceeds of approximately
          $861,000 from the sale of 310,000 shares and recorded a subscription
          receivable for the purchase agreements for 1,500,000 shares for which
          proceeds were never received.

          On February 21, 1995, 50-OFF filed a lawsuit [50-OFF STORES, INC. V.
          BANQUE PARIBAS (SUISSE), S.A., BETAFID, S.A., YANNI KOUTSOUBOS,
          ANDALUCIAN VILLAS (FORTY EIGHT) LIMITED, ARNASS LIMITED, BROCIMAST
          ENTERPRISES LTD., DENNIS MORRIS, HOWARD WHITE, CHASE MANHATTAN BANK,
          N.A. AND ARIES PEAK, INC., Case No. SA-95-CA-0159] in the United
          States District Court in San Antonio, Texas against Banque Paribas
          (Suisse) S.A. ("Paribas"), Yanni Koutsoubos, Chase, Howard White and
          certain affiliated individuals and companies in connection with the
          theft of 1,500,000 shares of  Old Common Stock which certain of the
          defendants had agreed to purchase at $3.65 per share.  Among other
          counts, the lawsuit alleged breaches of contracts, securities fraud,
          conspiracy and conversion.  The conversion claim related to actions of
          the defendants in the transferring, selling and trading of the shares
          despite the fact that the defendants had never paid for such shares.
          50-OFF sought recovery of actual and punitive damages and pre- and
          post-judgment interest.

          On October 14, 1997, the trial of this case began before the Honorable
          H.F. Garcia.  Defendants, Paribas, Chase and Dennis Morris, appeared
          and announced ready for trial.  On November 14, 1997, after four weeks
          of evidence, the Company entered into a Settlement Agreement and Full
          and Final General Release with Paribas.  As part of the settlement,
          Paribas agreed to pay the Company $2,400,000 (of which the Company
          received $1,800,000 after attorneys' contingency fees but before other
          related expenses) in exchange for which the Company agreed to dismiss
          all claims against Paribas with prejudice.  The Company also dismissed
          all claims against Dennis Morris; however, such dismissal was not the
          result of a settlement agreement between the parties.

          On November 20, 1997, at the close of evidence, the Company obtained a
          jury verdict against Chase on its claim of conversion in the amount of
          $150,975,000, representing $12,975,000 in actual damages and
          $138,000,000 in punitive damages.  On November 21, 1997, the Company
          moved the court to enter a final judgment against Chase in the amount
          of $148,575,000, which reflects the jury's verdict, minus a credit for
          Paribas' settlement amount.  In addition to the verdict against Chase,
          the Company obtained a $30,000,000 default judgment against Yanni
          Koutsoubos on its claims for violation of Section 10b-5 of the
          Securities Exchange Act and common law fraud.  Such judgment
          represents $10,000,000 in actual damages and $20,000,000 in punitive
          damages.  On December 4, 1997, the court entered a judgment against
          Chase in the Company's favor for $148,575,000 plus costs of court,
          pre-judgment interest on $12,975,000 at 10% per annum from November
          18, 1994 until December 4, 1997 and post-judgment interest on the
          entire judgment amount at 5.42% from December 4, 1997.  Subsequently,
          Chase filed five post-judgment motions with the court:  motion for new
          trial; motion to alter or amend the judgment; renewed motion for
          judgment as a matter of law; motion to apply a settlement credit and
          motion for leave to conduct oral deposition; and motion for hearing.
          On February 23, 1998, the court, having considered such motions, the
          supplements to such motions, the response of the Company to such
          motions and the entire record in the cause, denied all of Chase's
          post-judgment motions. Chase appealed the judgment entered by the
          court to the Fifth Circuit Court of Appeals in New Orleans.  The Fifth
          Circuit Court of Appeals requested and arranged a pre-hearing
          conference among the parties in New Orleans on May 14, 1998.  The
          parties were unable to reach a resolution at such conference, and,
          while discussions have continued, there is no sign of resolution by
          settlement.  On August 6, 1998, Chase filed its appeal brief with the
          Fifth Circuit Court o Appeals, and the Company has until October 8,
          1998 to file its response.

                                         -13-
<PAGE>

          On April 6, 1998, the court entered default judgments against Betafid
          S. A., Andalucian Villas (Forty-Eight) Limited, Arnass Limited,
          Brocimast Enterprises Limited, Howard White and Aries Peak, Inc. on
          the Company's claims for violations of  Section 10b-5 of the
          Securities Exchange Act and common law fraud.  Such judgments total
          $166,275,000, plus pre-judgment interest on $12,975,000 at 10% per
          annum from November 18, 1994 until April 6, 1998 and post-judgment
          interest on the entire amount at 5.31% from April 6, 1998.  On May 19,
          1998, the Company entered into a Settlement Agreement and Full and
          Final General Release with Howard White and Aries Peak, Inc.  As part
          of the settlement, Howard White agreed to pay the Company $150,000 (of
          which the Company received $100,000 after attorneys' contingency fees
          but before other related expenses) in exchange for which the Company
          agreed to dismiss all claims against Howard White and Aries Peak, Inc.
          with prejudice.

          The Company intends to vigorously pursue the favorable judgments
          obtained against defendants in the above matter.  The Company, based
          upon advice from counsel, believes that it will obtain a favorable
          result in the appeal of the judgment against defendant Chase
          referenced in the above proceeding.  To the extent reasonable, the
          Company intends to vigorously pursue the collection of the sums owing
          to the Company as per the judgments that have been obtained against
          the other defendants, although the collection of these judgments is
          uncertain.  Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the
          Company in these matters on a contingency fee basis.

          The Company is party to certain other legal proceedings, none of which
          are believed to be material.

NOTE 6:   The following table shows pro forma earnings per share calculated
          assuming that the Company's emergence from bankruptcy and the
          resulting recapitalization discussed in Note 2 occurred as of the
          beginning of each period.


<TABLE>
<CAPTION>

                               13 WEEKS ENDED   13 WEEKS ENDED    26 WEEKS ENDED   26 WEEKS ENDED
                               JULY 31, 1998    AUGUST 1, 1997    JULY 31, 1998    AUGUST 1, 1997
                               -------------    --------------    -------------    --------------
          <S>                  <C>             <C>                <C>              <C>
          Net income (loss)    $(3,259,277)    $(2,453,983)       $(2,239,280)     $(4,817,179)
          Weighted average
          number of shares       4,190,741       4,190,741          4,162,663        4,162,663

          Earnings per share        $(0.78)         $(0.59)            $(0.54)          $(1.16)

</TABLE>


                                         -14-
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following tables set forth (i) certain items in the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated
and (ii) the percentage change in such items from the comparable period of  the
prior year.


<TABLE>
<CAPTION>
                                                                  Percentage of Sales
                                               -------------------------------------------------------
                                                  Thirteen Weeks Ended        Twenty-six Weeks Ended
                                               -------------------------   ---------------------------
                                                July 31,       August 1,       July 31,    August 1,
                                                  1998           1997            1998        1997
                                                --------       ---------       --------    ---------
<S>                                             <C>            <C>             <C>         <C>

Net sales. . . . . . . . . . . . . . . . . .     100.0%         100.0%         100.0%         100.0%
Cost of sales. . . . . . . . . . . . . . . .       70.2           70.8           70.6           68.2
Selling, advertising, general and
  administrative . . . . . . . . . . . . . .       51.8           48.0           49.5           48.4
Depreciation and amortization. . . . . . . .        1.8            1.7            1.7            1.6
Pre-opening expenses . . . . . . . . . . . .        0.6              -            0.3              -
Store closing costs. . . . . . . . . . . . .        5.4              -            3.1              -
Reorganization items . . . . . . . . . . . .        0.9            1.9            0.4            2.2
                                                  -----          -----          -----          ----- 
Operating income (loss). . . . . . . . . . .      (30.7)         (22.4)         (25.6)         (20.4)
Other expense (income), net. . . . . . . . .       (1.5)           1.2          (16.1)           1.2
                                                  -----          -----          -----          ----- 
Total expenses . . . . . . . . . . . . . . .      129.3          123.6          109.6          121.6
                                                  -----          -----          -----          ----- 
Income (loss) before income taxes. . . . . .      (29.3)         (23.6)          (9.6)         (21.6)
Net income (loss). . . . . . . . . . . . . .      (29.3)%        (23.6)%         (9.6)%        (21.6)%
                                                  -----          -----          -----          ----- 
                                                  -----          -----          -----          ----- 

</TABLE>


<TABLE>
<CAPTION>

                                                                 Percentage Change
                                             -------------------------------------------------------
                                                Thirteen Weeks Ended         Twenty-six Weeks Ended
                                              July 31, 1998 compared to    July 31, 1998 compared to
                                                Thirteen Weeks Ended        Twenty-six Weeks Ended
                                                   August 1, 1997               August 1, 1997
                                             ---------------------------  --------------------------
<S>                                          <C>                           <C>

Net sales. . . . . . . . . . . . . . . . . .             7.2%                          4.8%
Cost of sales. . . . . . . . . . . . . . . .             6.4%                          8.4%
Selling, advertising, general
   and administrative. . . . . . . . . . . .            15.8%                          7.3%
Depreciation and amortization. . . . . . . .            13.5%                         13.5%
Reorganization items . . . . . . . . . . . .           (50.0)%                       (80.0)%
Operating income (loss). . . . . . . . . . .            47.1%                         31.7%
Other expense (income), net. . . . . . . . .            NC                            NC
Income (loss) before income taxes. . . . . .            32.8%                        (53.5)%
Net income (loss). . . . . . . . . . . . . .            32.8%                        (53.5)%

</TABLE>



                                         -15-
<PAGE>

THIRTEEN WEEKS ENDED JULY 31, 1998 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 1,
1997:

The net sales increase of 7.2% for the thirteen weeks ended July 31, 1998
compared to the thirteen weeks ended August 1, 1997 is attributable primarily to
a 6.3% increase in the weighted average number of stores in operation (from
41.0 stores to 43.6 stores ) and a 5% increase in comparable store merchandise
sales (due primarily to improved inventory balance at the store level and the
increased resources to promote customer traffic to the stores) and is partially
offset by a decline in other income, including income from leased shoe
departments.

Cost of sales as a percentage of net sales decreased from 70.8% for the thirteen
weeks ended August 1, 1997 to 70.2% for the thirteen weeks ended July 31, 1998,
due primarily to higher maintained margins compared to the prior year, offset 
by a $150,000 charge for inventory markdowns anticipated at a closing store. 
Without such charge, cost of sales as a percentage of net sales would have 
been 68.9% for the fiscal 1999 period.

Selling, advertising, general and administrative expense increased from 48.0% of
net sales for the thirteen weeks ended August 1, 1997 to 51.8% of net sales for
the thirteen weeks ended July 31, 1998 due primarily to a substantial increase
in advertising expenses from approximately $219,000 (approximately 2.1% of
sales) for the thirteen weeks ended August 1, 1997 to $951,000 (approximately
8.5% of sales) for the thirteen weeks ended July 31, 1998.  The 15.8% increase
in the amount of selling, advertising, general and administrative expense
compared to the thirteen weeks ended August 1, 1997 was the result of the 6.3%
increase in the weighted average number of stores in operation and the
substantial increase in advertising expenses.

Depreciation and amortization expense increased by 13.5% in the thirteen weeks
ended July 31, 1998 compared to the comparable period of fiscal 1998, due
primarily to capital expenditures associated with the increased number of
stores in operation and the second-half fiscal 1998 conversions of existing 
stores to the LOT$OFF format.

Other (income) expense increased approximately $290,000, from an expense of
$127,000 in the thirteen weeks ended August 1, 1997 to income of $163,000 in the
comparable period of fiscal 1999, due primarily to income from litigation
partially offset by higher interest expense caused by a higher average
outstanding loan balance for the period ended July 31, 1998 and the cessation of
interest accrual on liabilities subject to compromise through June 16, 1997 of
the fiscal 1998 period.

The increase in the Company's loss before income taxes for the thirteen weeks
ended July 31, 1998 compared to the loss for the thirteen weeks ended  August 1,
1997 is primarily due to store closing expenses, higher advertising and interest
expenses and pre-opening expenses.

Income tax benefits related to the losses for the fiscal 1998 and 1999 periods
were not recognized because the utilization of such benefits were not assured.

TWENTY-SIX WEEKS ENDED JULY 31, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
1, 1997:

The net sales increase of 4.8% for the twenty-six weeks ended July 31, 1998
compared to the twenty-six weeks ended August 1, 1997 is attributable primarily
to a 5.8% increase in the weighted average number of stores in operation (from
41.3 stores to 43.7 stores ) and a 4.1% increase in comparable store merchandise
sales (due primarily to improved inventory balance at the store level and the
increased resources to promote customer traffic to the stores) and is partially
offset by a decline in other income, including income from leased shoe
departments.

Cost of sales as a percentage of net sales increased from 68.2% for the
twenty-six weeks ended August 1, 1997 to 70.6% for the twenty-six weeks ended
July 31, 1998, due primarily to inventory  markdowns taken primarily in April
1998 as part of an effort to liquidate aged merchandise, especially apparel
inconsistent with the Company's current merchandising philosophy, and a 
$150,000 charge for inventory markdowns, anticipated at a closing store, 
partially offset by otherwise higher maintained margins compared to the prior 
year. Excluding the $342,091 of revenue realized on the sale of such aged 
merchandise and the related cost of sales of $761,281 (including $423,400 of 
markdowns) and the $150,000 charge, the cost of sales as a percentage of net 
sales would have been 67.7% for the recent period reflecting the otherwise 
higher maintained margins.

Selling, advertising, general and administrative expense increased from 48.4% of
net sales for the twenty-six weeks ended August 1, 1997 to 49.5% of net sales
for the twenty-six weeks ended July 31, 1998 due primarily to a substantial
increase in advertising expenses from approximately $1,149,000 (approximately
5.2% of sales) for the twenty-six weeks

                                         -16-
<PAGE>

ended August 1, 1997 to $1,868,000 (approximately 8.0% of sales) for the
twenty-six weeks ended July 31, 1998.  The 7.3% increase in the amount of
selling, advertising, general and administrative expense compared to the
twenty-six weeks ended August 1, 1997 was the result of the 5.8% increase in the
weighted average number of stores in operation and the substantial increase in
advertising expenses.

Depreciation and amortization expense increased by 13.5% in the twenty-six 
weeks ended July 31, 1998 compared to the comparable period of fiscal 1998, 
due primarily to capital expenditures associated with the increased number of 
stores in operation and the second-half fiscal 1998 conversions of existing 
stores to the LOT$OFF format.

Other (income) expense improved $4,021,000 from an expense of $269,000 in the
twenty-six weeks ended August 1, 1997 to income of approximately $3,752,000 in
the comparable period of fiscal 1999, due primarily to the corporate
reorganization described in Note 4 of Notes to Condensed Consolidated Financial
Statements and the related receipt of $5.8 million of proceeds from GECC
partially offset by higher interest expense caused by a higher average
outstanding loan balance for the period ended July 31, 1998 and the cessation of
interest accrual on liabilities subject to compromise through June 16, 1997 of
the fiscal 1998 period.

The decrease in the loss before income taxes for the twenty-six weeks ended July
31, 1998 compared to the loss for the twenty-six weeks ended  August 1, 1997 is
due to the corporate reorganization described above and in Note 4 to Notes to
Condensed Consolidated Financial Statements.

Income tax benefits related to the losses for the fiscal 1998 and 1999 periods
were not recognized because the utilization of such benefits were not assured.

INCOME TAX

As of January 30, 1998, the Company had a federal tax net operating loss ("NOL")
carryforward of approximately $58,549,000 expiring through 2014, an alternative
minimum tax credit carryforward of approximately $337,000, which is available to
offset regular federal income taxes in the future until fully utilized, and a
targeted jobs credit carryforward of approximately $178,000 expiring in 2006
through 2009.  As a result of the bankruptcy proceedings and the related Plan,
the NOL carryforward, tax credit carryforward and other tax attributes of the
Company will be reduced (perhaps significantly) as a result of debt forgiveness
income in accordance with section 108(b) of the Internal Revenue Code ("IRC")
and/or the receipt of substantial net lawsuit proceeds in excess of such debt.
In addition, IRC section 382 limits a NOL and a tax credit carryforward when an
ownership change of more than fifty percent of the value of stock in a loss
corporation occurs within a three year period.  Under the Plan and through
subsequent transactions by investors in the Company's Common Stock, the
ownership of the Company may be deemed to have changed by more than fifty
percent.  Accordingly, to the extent NOL and tax credit carryforwards remain
after reduction under IRC section 108(b) and /or the receipt of any net lawsuit
proceeds, the ability to utilize remaining NOL and tax credit carryforwards may
be significantly restricted.

STORE DEVELOPMENT PLANS

While the Company will concentrate near term principally on developing existing
stores to full maturity, it is management's intention to expand the Company's
regional presence in existing and new markets, especially in Texas. The Company
currently expects to be operating over 50 stores by this fiscal year's
Christmas/holiday shopping season after the opening of new stores (limited to
existing and new markets in Texas) and the closing of certain stores (the
Lawton, Oklahoma store closed on April 25, 1998, the store in Shreveport,
Louisiana closed on July 23, 1998, the store in Lubbock, Texas closed on July
22, 1998, and the store in Amarillo, Texas is expected to close on September 23,
1998) through negotiated lease cancellations or lease expirations.  New stores
are expected to be smaller than the Company's current stores which average
25,900 square feet (22,120 square feet of selling space).  Consistent with its
store development plan, the Company opened a 13,800 square foot store in San
Angelo, Texas on June 6, 1998, a 19,200 square foot store in Lubbock, Texas on
July 25, 1998 and a 6,493 square foot store in Killeen, Texas on August 14,
1998.  New stores are expected to open by the week of September 21, 1998 in
Carrollton (8,041 square feet) and Mesquite (8,506 square feet), Texas, by the
week of  September 28, 1998 in Dallas (11,020 square feet), Bedford (12,616
square feet) and San Antonio (15,143 square feet), Texas, and by the week of
October 12, 1998 in Dallas (12,548 square feet), Irving (11,200 square feet) and
Lewisville (15,000 square feet), Texas.


                                         -17-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company began fiscal 1998 with cash of $473,533.  During the twenty-six
weeks ended July 31, 1998, the Company generated $2,901,981 from financing
activities ($121,251 from the exercise of stock options under the Company's
stock option plan, $1,829,369 from the obligation to GECC related to the
corporate reorganization discussed in Note 4 of Notes to Condensed Consolidated
Financial Statements, $895,000 from a private placement of Notes and warrants
also discussed in Note 4 and $208,897 from an increase in the Company's
outstanding balance under its credit agreement with GECC net of an $88,786
decrease in bank checks outstanding and $58,750 in payments on long term debt),
used $2,796,152 in operating activities, used $53,090 for capital expenditures
and ended the period with cash on hand of $526,272.

On June 16, 1997, the Company entered into a credit agreement with GECC 
providing the Company with a revolving credit facility through June 16, 2000 
of up to $15,000,000.  The credit facility bears interest at a floating rate 
equal to the published rate for thirty-day commercial paper issued by major 
corporations (5.53% at July 31, 1998) plus 3% per annum and provides for an 
unused facility fee of 0.5% per annum.  Borrowings under the facility are 
available in aggregate amounts up to 65% of LOT$OFF's eligible inventory for 
the period from August 15 through December 15 and up to 60% for the period 
from December 16 through August 14, subject to certain required reserves.  
The credit facility is collateralized by inventory, accounts receivable and 
other assets. The credit agreement, as amended, contains certain reserve 
requirements, various restrictive covenants, including restrictions on the 
payment of dividends on Common Stock, and various financial covenants, 
including minimum EBITDA, minimum working capital and minimum availability.  
See Notes 1 and 4 of Notes to Condensed Consolidated Financial Statements.  
As of  August 25, 1998,  LOT$OFF had approximately $8,035,000 available for 
borrowings under the credit facility (after reserves of $727,000) of which 
$6,958,000 was committed, leaving a net availability of $1,077,000.

Management believes that borrowings available under its revolving credit 
facility, available trade credit, its restructuring of certain obligations 
under the Plan, the capital obtained from the purchase by GECC of a 
contingent claim on a $10,000,000 portion of the potential net proceeds from 
the judgment obtained against The Chase Manhattan Bank for $5.8 million (see 
Notes 3 and 5 of Notes to Condensed Consolidated Financial Statements), net 
proceeds from the recent Note financing, anticipated proceeds from 
outstanding litigation, its operating cash flow and its cash on hand will be 
adequate to finance its operations, including the opening of new stores in 
Texas, through fiscal 1999.  No assurance can be given, however, that such 
sources of capital will be sufficient or, in the case of anticipated proceeds 
from important litigation, timely received or that the Company will be 
successful in its continuing efforts to attain profitability.  For these 
reasons, any investment in Common Stock should be considered speculative, and 
additional external financing may be necessary.  The receipt of additional 
proceeds from the significant litigation brought by the Company could add 
significantly to the Company's liquidity and capital resources.  See Notes 1 
and 5 of Notes to Condensed Consolidated Financial Statements.

SIGNIFICANT LITIGATION

The Company has received a jury verdict and substantial judgments in its 
favor from a lawsuit, under appeal, related to certain parties' breaches of 
contractual obligations to purchase 1,500,000 shares of Old Common Stock and 
actions in misappropriating and removing these shares from an escrow account 
prior to payment for such shares.  The Company intends to vigorously pursue 
all reasonable available avenues to effect the receipt of payment for actual 
and punitive damages.  The matter is being handled by counsel on a 
contingency fee basis.  The Company, based upon advice of counsel, believes 
that it will obtain a favorable result in this lawsuit.  See Note 5 of Notes 
to Condensed Consolidated Financial Statements for further discussion of this 
matter.

SEASONALITY AND QUARTERLY FLUCTUATIONS

As with most retailers, highest net sales and operating income are experienced
during the fourth quarter, which includes the Christmas/holiday selling season.
Otherwise, LOT$OFF's business is heaviest on weekends (Friday through Sunday)
and at the beginning of each month.  Any adverse trend in net sales for the
fourth quarter could have a material adverse effect upon the Company's results
of operations for an entire fiscal year.


                                         -18-
<PAGE>

In addition to seasonality, the Company's results of operations may fluctuate
from quarter to quarter as a result of the timing of store openings and/or
closings, including the level of advertising and pre-opening expenses associated
with store openings and inventory markdowns and other expenses associated with
store closings, as well as other factors.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

YEAR 2000 COMPLIANCE

The Company is evaluating its information systems for Year 2000 compliance,
which refers to its having information systems that will accurately process date
and time data for the Year 2000 and beyond.  The Company currently expects to
replace certain software programs, modify other software programs and complete
testing of all programs prior to July 1999 in order to achieve Year 2000
compliance.  While a complete cost analysis cannot be done prior to completion
of the evaluation phase, the Company does not currently expect these costs to
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.  The Company is communicating with its suppliers of
products and services in order to assess the extent of those companies' Year
2000 compliance.

FORWARD-LOOKING INFORMATION

This Form 10-Q, including Management's Discussions and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources, contains
various forward-looking statements and information that are based on
management's beliefs as well as assumptions made by and information currently
available to management.  When used in this document, the words "believe",
"expect", "anticipate" and similar expressions are intended to identify
forward-looking statements.  Such statements are subject to certain risks,
uncertainties and assumptions including those set forth below and identified
elsewhere herein.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.  In addition
to the other risk factors set forth above and in Note 1 of Notes to Condensed
Consolidated Financial Statements, among the key factors that may have a direct
bearing on the Company's results are competitive practices in the close-out
merchandising industry generally and particularly in the Company's targeted
market, the result and timing of resolution of significant litigation the
Company is pursuing and the ability of the Company to fund its continuing
operations in the event of disappointing operating performance or adverse
industry or economic conditions, including economic conditions along the 
border of Texas and Mexico.

                                      PART II

ITEM 1.   LEGAL PROCEEDINGS

See Note 5 of Notes to Condensed Consolidated Financial Statements regarding a
lawsuit filed in February 1995.  Such lawsuit was also reported in the Company's
annual reports on Form 10-K for the fiscal years ended February 3, 1995,
February 2, 1996, January 31, 1997 and January 30, 1998 and was the subject of a
report on Form 8-K dated December 9, 1997.

The Company is a party to certain other legal proceedings arising in the
ordinary course of business, none of which are believed to be material.

ITEM 2.   CHANGES IN SECURITIES

None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.


                                         -19-
<PAGE>

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Stockholders was held July 14, 1998 in San
Antonio, Texas.  The record date for the Annual Meeting was May 28, 1998.  At
May 28, 1998, there were 4,159,210 shares of Common Stock outstanding, 1,596,420
shares of which were held in an escrow account at Continental Stock Transfer &
Trust Company for the benefit of holders of allowed general unsecured claims
pending delivery upon the filing and/or resolution of claims objections under
the Company's confirmed Plan of Reorganization, as Amended and Modified.  Such
escrowed shares were not entitled to vote at the Annual Meeting. During the
Annual Meeting, the Company's five directors were re-elected for one year terms.


ITEM 5.   OTHER INFORMATION

ITEM 6    EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

          Exhibit 10 - Fifth Amendment to the General Electric Capital
                    Corporation Revolving Credit Agreement

          Exhibit 27 - Financial Data Schedule

     (b)  Reports on Form 8-K


                             SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:

                         LOT$OFF CORPORATION

                    By:  /s/ CHARLES J. FUHRMANN II
                         -------------------------------------------------------
                         Charles J. Fuhrmann II, Chairman, President and
                         Chief Executive Officer (Principal Executive Officer)

                    By:  /s/ JEFF SEIDEL
                         -------------------------------------------------------
                         Jeff Seidel, Vice President-Finance and Chief Financial
                         Officer (Principal Financial and Accounting Officer)


                                         -20-
<PAGE>


                                   EXHIBIT INDEX



                                                                      Page


Exhibit 10

Exhibit 27

                                          21